Purchasing managers are increasingly looking for new procurement markets in order to broaden their supplier portfolio or to relocate production entirely. In their diversification efforts companies should certainly consider Vietnam as a future market – the East Asian country offers European partners numerous advantages, especially due to the free trade agreement with the European Union, which has been in force since 2021. We discuss Vietnam as a procurement market and explain the opportunities offered by this emerging economy.
- Vietnam, data and facts:
- Economic development
- Branches of production
- Economic regions
- Free trade/ tariffs
- Investment climate and market entry
Vietnam, data and facts:
Population 2022: 98.2 million
Demographics: 32 years (median), 68.6 percent range between 15 an 64 yrs.
Gross domestic product 2021: 366 million US dollars (+261 %/ 2020)
GDP per capita in 2021: 3,725 US dollars
Economic growth 2022: approx. 7 percent
Foreign direct investment (FDI) 2022: 25 billion US dollars
Trade volume 2022: 750 billion US dollars
Export surplus 2022: 1 billion US dollars
Raw materials, e.g.: Rare earths, bauxite, manganese, phosphate
Main product groups: Electrical engineering, machinery/ mechanical products, textiles/ clothing/ footwear
With economic growth of around 7 percent, a trade volume of 750 billion US dollars and an export surplus of 11 billion US dollars, Vietnam was one of the emerging global and most promising Asian economic markets in 2022. Numerous companies have recognized the potential and regard Vietnam primarily as an alternative or complement to Chinese partnerships: according to a survey conducted among 200 executives by the European Chamber of Commerce in Vietnam, 41 percent of companies had relocated some of their operations to Vietnam in the last quarter of 2022, rising from 13 percent in the previous quarter.
Targeted programs and development plans
For many years, development has been following a clear objective: with national programs, administrative reforms and trade facilitation and promotion, the government of the East Asian country is striving for improved export terms, growth and attractive starting conditions for foreign investors. The stabilization of the economy after the Corona pandemic was also targeted by a program for socio-economic recovery and development. In addition, the Vietnamese government is promoting global economic integration. This includes the international free trade agreement between the EU and Vietnam (EVFTA), the Trans-Pacific Partnership (CPTPP) or the Regional Economic Partnership (RCEP).
The success is also reflected in the significantly growing prosperity of the population: while half of the inhabitants lived below the poverty line in the 1990s, the figure currently amounts to approximately 7 percent. In urban areas, the middle class is growing strongly and gaining purchasing power thanks to higher employment figures and moderately rising wage levels.
According to the report of the European Business Association in Vietnam, nearly half of European companies (45 percent) rated the business outlook in Vietnam as positive in 2022. 42 percent plan to expand their investments in Vietnam. Given the government’s ambitious goals, driven by massive economic development and the growing prosperity of the population, experts predict that the country will rank among the world’s largest consumer markets within a few decades. In addition, Vietnam offers various locational advantages to European companies wishing to produce and purchase goods locally.
- Branches of production
Vietnam has established itself on the world market as one of the most important manufacturing locations for export products in the electronics, textile and leather goods, as well as furniture segments. Thanks to a large number of agricultural raw materials such as rice, coffee, sugar cane and corn, the country is also a significant exporter of agricultural products.
Industrial growth is one of Vietnam’s primary economic goals. The economic upswing of the past decade was mainly driven by the rapid development of the manufacturing industry – above all, the electrical industry as the most important branch of production. Further, despite the overall increase, wages are still quite low by global standards.
Economic regions and clusters
Three strong economic clusters have established in Vietnam, specializing in different manufacturing sectors. The economic and political framework conditions for investments and settlements still differ greatly depending on the region.
Ho Chi Minh City Region (HCMC)/ Mekong Delta
The largest economic region is the metropolis of Ho Chi Minh City (HCMC) together with the surrounding provinces and the Mekong Delta, which plays an important role in food production as the country’s “granary” and main region for the fishing industry. This region is estimated to generate about one-third of Vietnam’s GDP.
The north between the capital Hanoi and the port city Haiphong is steadily catching up. Electronics giants – especially from Taiwan and the USA – have settled around Hanoi. The government plans to develop the north into an automotive and supplier cluster.
In the southern industrial zones, many foreign-invested companies produce clothing, shoes, furniture and electronics for export.
Competition between the regions
There is fierce competition between the individual provinces, which is also promoted by the state. The Provincial Competitiveness Index regularly examines and compares the competitiveness of the country’s 63 provinces.
Free trade/ tariffs
Various free trade agreements make Vietnam an attractive production location for foreign companies and offer optimal conditions for organizations seeking to diversify their supply chains in Asia and open up further sites in the region. For example, Vietnam is involved in the Trans-Pacific Partnership (CPTPP) and the Regional Economic Partnership (RCEP).
EU-Vietnam Free Trade Agreement (EVFTA)
Within the Association of Southeast Asian Nations (ASEAN), Vietnam is the second largest export destination for the EU, which in turn is Vietnam’s fourth largest trading partner. In order to facilitate trade, define terms and conditions as well as provide higher protection for investment projects on both sides, a far-reaching free trade agreement came into force August 1st in 2020.
Over the next ten years, more than 99 percent of tariffs will be eliminated for goods traded on both sides: The day that the agreement had come into force, Vietnam already lifted 65 percent of its tariffs on EU goods. The rest will be phased out by 2030. For goods from Vietnam to the EU, 71 percent of the tariffs were eliminated immediately, and for the remaining ones, this is planned to be done gradually until 2027. The asymmetrical approach takes into account the fact that Vietnam is still classified as a developing country by the EU.
With the trade agreement, the contracting parties enter into commitments to ensure a high level of protection for labor and environmental standards as well as consumer protection. The agreement also means greater security for investment projects on both the European and Vietnamese sides.
Investment climate and market entry
Vietnam continues to develop positively as an investment market. Here, too, the government is consciously improving the framework conditions in order to make the environment attractive for international investors and private-sector involvement. The attraction of foreign direct investment with FDI capital of more than 25 billion US dollars in 2022 is to be seen as an important milestone in Vietnam’s economic development.
Thanks to the targeted progress in development, Vietnam offers a wide range of opportunities for market entry. However, when entering new markets and relocating production sites, companies also encounter numerous challenges, for example with regard to infrastructure and logistical development. In addition, ESG criteria, such as those stipulated by the Supply Chain Act, are becoming increasingly important in the assessment of opportunities and risks.
In the second part of our overview of the emerging market Vietnam, we will take a closer look at structural conditions, specific challenges and the status quo of the implementation of the Due Diligence Act, enriched by valuable expert advice from Hermes logistics partner SEKO, which is quite familiar with the Vietnamese market.